Goldman Complains About Bloomberg's Electronic Snooping

Goldman Sachs is not happy that Bloomberg News reporters turned the investment bank's
Bloomberg financial data terminals into breaking-news gatherers. But that's what happens when the urge for competitive advantage in the digital age prevails over common sense.

Of course, this is not the only example of how snooping on customers without their knowledge can lead to a bad news day. Nordstrom's recent decision to quit using Euclid to track customers in 17 of its stores is another example.

But the Bloomberg case is special. What Bloomberg News admitted it did at Goldman, according to the New York Times, was to monitor bank employees' usage of their Bloomberg terminals. And when a partner stopped logging into his terminal, Bloomberg News inquired whether that partner had left Goldman.

That's according to the New York Post, that wrote on May 10, "In one instance, a Bloomberg reporter asked a Goldman executive if a partner at the bank had recently left the firm — noting casually that he hadn’t logged into his Bloomberg terminal in some time. Bloomberg staffers could also [determine] how many times [Goldman employees] had used particular functions."

Bloomberg News acknowledged that at least one reporter had gained access to information on Goldman Sachs [when] the bank complained to Bloomberg in April. Matthew Winkler, Bloomberg editor in chief, wrote an editorial in which he apologized for this decades-long practice, noting, “Our clients are right. Our reporters should not have access to any data considered proprietary. I am sorry they did. The error is inexcusable.”

The technical means by which Bloomberg News reporters gained access to this customer information is a Bloomberg terminal function called UUID. UUID enabled “several hundred” reporters "to get background on an individual subscriber, including contact information, and when the subscriber had last logged on," according to the Times.

According to the Times, Bloomberg’s 2,400 plus journalists must spend hours training to use the terminals, and "several former employees said that training included informal tips on how to use UUID to locate sources who were also subscribers."

And reporters also used UUID for other purposes. "[Occasionally] reporters monitored chats between those subscribers and customer service representatives. Reporters could not see a subscriber’s specific securities, trades or which news articles they had read," wrote the Times.

To understand why Bloomberg would do this, it helps to understand financial data industry dynamics. Many of the fundamental forces driving the business of gathering and distributing security price data and financial news and analysis have remained the same for decades.

As I wrote in May 2007, I first began thinking about this in 1984 when I worked on a consulting project for the New York Stock Exchange on the threat it faced from electronic stock quote providers. In July 1986, Banker's Magazine published my article, Strategic Developments in Investment Information, that I based on this project. The point of that article that's still relevant today is that people will pay good money for information if it satisfies three tests:

It's proprietary;

It helps minimize the risk associated with a big investment; and

The price of the information is a small proportion of that investment.

Here's an example. Bloomberg LP's enormous profitability -- its 315,000 terminals rent for $20,000 a year and account for a large chunk of non-operating owner, Michael Bloomberg's $27 billion net worth -- is due to traders' willingness to pay big sums for its unique mix of news and information, coupled with complex tools that big-bucks traders use to evaluate investment decisions.

If Bloomberg only sold commodity-type information traders would not be willing to pay for it since they could get that information for free elsewhere. But because Bloomberg offers proprietary tools that help traders minimize the risk on billion dollar transactions, the traders are willing to pay big bucks for it.

This market data business accounted for 85% of Bloomberg's $7.9 billion in 2012 revenues. But Bloomberg is also in the much more highly competitive and thin-margined news business. In order to prevail there, it helps to break exclusive stories that reach readers first.

This brings to mind a concept from corporate strategy -- inter-relationships. That's an ugly word for a simple idea -- a corporation can gain market share if it makes shrewd choices about sharing capabilities across its business lines.

Bloomberg News and Bloomberg's terminal business shared customer information. The hope appears to have been that Bloomberg reporters would use this proprietary information to break news about the financial executives and traders who use its terminals.

What Bloomberg may not have thought enough about is that if the existence of that inter-relationship got into the hands of other reporters, the news might enrage its terminal customers.

Since the terminals are so critical to customers' operations and there is little comparable competition, I doubt many of Bloomberg's 315,000 subscribers will cancel their terminal contracts. But if Bloomberg News reporters continue to use the terminals to snoop on customers, I'd change my forecast.

But you don't have to be a genius to realize that it doesn't make sense to endanger a huge, highly profitable business to get an edge in another one that accounts for a tiny sliver of that profit.